Credit unions are well regarded for their commitment to serving their communities. This often includes providing banking services to people and organizations that are traditionally underserved by financial institutions. As a result, credit unions have become adept at forging close relationships with their members to offset the risks associated with these types of accounts. Getting to know a business owner personally or developing a better understanding of a member’s business is a core part of most credit unions’ DNA. When it comes to the cannabis industry, credit unions can apply these same operational best practices to serve marijuana-related businesses (MRBs) in legal cannabis states. So, what is keeping so many credit unions on the sidelines of this fast-growing and profitable industry?
The issue most bankers point to is the discrepancy between state and federal law. Today, some form of medical or recreational marijuana is legal in 33 states, yet cannabis continues to be listed as an illegal Schedule 1 drug under the federal Controlled Substance Act. While efforts have been made in Congress to advance bills that would legalize marijuana and protect financial institutions serving MRBs, we’re not expecting to see progress on this issue until after the November election, at the earliest.
The truth is, enhanced due diligence requirements for credit unions serving the cannabis industry will likely remain in place regardless of marijuana’s legal status or if other legislative protections, such as the SAFE Banking Act, are passed into law. This is because each state will still be operating its unique system and has an interest in keeping the inventory and tax revenue within its jurisdiction. In addition, financial institutions will still be held accountable for guarding against legacy funds and illegal sales activity.
Fortunately, there is a path forward for credit unions to serve the legal cannabis industry today and pass compliance exams. In fact, the National Credit Union Administration (NCUA) has said it would not sanction credit unions with cannabis banking programs as long as they comply with necessary financial regulations, like money laundering policies, the Bank Secrecy Act, and other rules.
KeyPoint Credit Union introduced a cannabis banking program in February. Originally launched as part of a growth strategy centered around assisting underserved segments of the communities it serves, the program quickly became a valuable source of non-interest income as the coronavirus pandemic shifted economic dynamics for the California-based credit union. Acknowledging that “every financial institution board is risk-averse,” Cole Saini, KeyPoint’s Director of Risk Management, has embraced the implementation of new technologies to automate the monitoring and validation of high-risk accounts. This, he says, “has enabled us to deliver on our AML/BSA requirements, while at the same time reduce our reliance on expensive human capital to manage the program. As a result, we have lowered our costs significantly while maintaining extremely high levels of compliance.”
Credit unions considering the cannabis banking opportunity should keep the following points in mind:
- First and particularly important considering the impact COVID-19 has had on the financial industry, cannabis banking can provide a source of reliable non-interest income. As net interest margins compress, credit unions should look to non-interest income business lines to support overall profitability. Cannabis companies are in dire need of quality banking solutions and are willing to pay upwards of ten times the amount of traditional business service charges. Assessing substantially higher base account charges, often without the benefit of an earnings credit to offset those charges, means there are untapped cash management fee opportunities. Together, these fees can fully offset the operational cost of providing a cannabis banking program.
- Compliance technologies can reduce costs and support remote banking. As KeyPoint Credit Union found, new platform technologies make it possible to automate compliance and risk-management processes, significantly reducing the labor and expense required to conduct the systematic due diligence this industry demands. Cannabis banking technologies can also enable contactless payments, as well as facilitate new member applications, account underwriting, and risk assessment via remote, online processes.
- Longer-term, cannabis banking can provide a source of low-cost deposits. The pressure to grow and attract low-cost deposits may wane momentarily because of the coronavirus pandemic, but these deposits are expected to continue to be a driver of credit union profitability in the long run. Increasing those deposits now will protect future profitability as the economy improves.
As public acceptance of cannabis grows and laws are reconciled, credit unions that enter this market early are expected to have a strong competitive advantage on new member accounts. In addition to the financial rewards the cannabis industry offers, credit unions can also enjoy a high degree of satisfaction knowing they are helping entrepreneurs in an underserved industry succeed, expand, and operate more safely in their communities.